The Hindu Business Line : A thrust for agriculture investment

THE Budget seeks to provide a big push to investment in agriculture and social infrastructure (health and education), and emphasises that the Government will have to play the role of facilitator in this regard.

As for agricultural growth, the Budget assumes that diversification and development of the agro-processing industry will provide the required boost. The Budget also attempts to correct the declining trend in public investment in agriculture through enhanced farm credit, among other measures. However, though the steps proposed in the Budget are welcome, the key to sustained growth in agriculture may lie with investment in productivity-enhancing activities rather than input subsidies.Perhaps, the biggest challenge for the Budget was to allocate sufficient funds for the development of social infrastructure. As widely anticipated, the new Government has imposed an education cess of 2 per cent for the purpose. However, as the Budget acknowledges, the collection of 2 per cent cess will result in an additional resource mobilisation of just Rs 4,000-5,000 crore in a full year, while the total expenditure requirement (of the Centre and the States combined) is around Rs 1,80,000 crore.

As for the balance-sheet of the Government, the fiscal deficit as a percentage of GDP has been budgeted at 4.4 per cent for FY2005. The good news is that at this level there has been a progressive decline since FY2002. The bad news is that on closer examination, nominal GDP growth for FY2005 is budgeted at 13.5 per cent. This translates into an inflation rate of 6.5 per cent, assuming a GDP growth rate of 6.5-7 per cent. Clearly, the Budget has an in-built assumption of a higher inflation.

As for revenue mobilisation through direct taxes, the Government has clearly acknowledged that it is better to broaden the base than to tinker with the rates. The increase in the exemption limit for individuals to Rs 1,00,000 will serve as a feel-good factor for the salaried group. However, the 2 per cent surcharge may well negate the objective of having a tax system free of surcharges. Regarding indirect taxes, the peak rate of Customs duty remains unchanged at 20 per cent. The idea of integrating the proposed Value Added Tax (VAT) on services with the VAT on goods, and that of bringing more services within the tax net are positive steps. After all, the service sector contributes to over 50 per cent of GDP even as its tax share in GDP is less than 1 per cent.

In revenue mobilisation through capital receipts, an area of concern is the disinvestment proceeds. Disinvestment proceeds for FY2005 have been set at Rs 4,000 crore. This is much lower than the estimated Rs 14,500 crore for FY2004. Moreover, the Government has outlined the end-use of such disinvestment proceeds, stating that the proceeds would be used in the social sector. This is a welcome development, given that disinvestment proceeds have so far been used to cover the fiscal gap of the Government.

As for the capital market, the Budget has abolished the long-term capital gains tax and lowered the short-term capital gains tax to 10 per cent from 30 per cent. Also, a turnover tax of 0.15 per cent has been imposed. Overall, it appears that the combination of these measures would provide an impetus to the stock market.

(The author is Managing Director, ICRA Ltd.)